During 2008, the sudden widening of credit spreads led to a rapid decrease in the value of many financial assets, revealing a general shortage of capital for many financial institutions, with some critical peaks that required fund injection and public bailouts.The evidence of a substantial...

Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between Merton-type and Black-Cox-type structural default models. Our...

I document that equity prices fall as macroprudential buffers are announced. This is consistent with macroprudential buffers leading to an increase in risk premia, from a heightened price of risk. Theoretically, I develop a model that predicts that as buffers are announced 1) The price of risk...

Prior literature mostly finds bond yield spreads to be insufficiently explained by credit risk (the 'credit spread puzzle'). Recently, Feldhütter and Schaefer (2018) and Bai et al. (2020) revived this debate. We utilize the removal of sovereign guarantees for savings banks and state banks in...

Several countries have banking policies geared towards providing access to credit to ethnic or religious minorities, e.g., India, China, Malaysia, South Africa, United States. In this paper, we characterize the compensating risk premium for such minority bank (MB) policies. Our theory apparatus...

Under the new Basel II regulatory framework, the need for an effective risk-adjusted pricing mechanism has become even more central in banking than in the past: banks are spurred to develop risk-adjusted measures, to avoid wasteful customers' cross-subsidization and support the value creation...

This paper examines the market price of risk for discount bond prices under an affine term structure of interest rates. The usual relation plays two roles. First, it is the definition of market price of risk and, second, it provides a no arbitrage condition for the discount bond market. Here the...

The multi-factor model “with square root” is discussed in details. For such model, the representation of state variable process in the integral form is derived and its covariance matrix is found. The special attention to the problem connected with the tendency for the term structure of...

Using the unique regulatory setting from the Hong Kong stock market with both shortable and no-short stocks, we document that no-short stocks on average earn significantly higher average returns than shortable stocks. Furthermore, stocks that comove more with the portfolio of no-short stocks...

Municipal (muni) bonds are risky and trade in illiquid markets, and both effects serve to raise muni yields relative to Treasuries. On the other hand, the tax exemption of muni bonds tends to lower their yields. We decompose the muni yield spread into credit, liquidity, and tax components....